You may recall that the ability to recharacterize a Roth IRA conversion went away as part of the tax cut that passed in 2017. It wasn’t a major sticking point of the legislation, but it did create some concern about how it could affect those saving for retirement. However, I want to remind you that only recharacterization of Roth IRA conversions went away and that the ability to recharacterize other types of transactions still remains a possibility. For example, if you made a Roth IRA contribution but did not realize that you were above the income threshold to do so, you could potentially recharacterize that contribution to that of a traditional IRA. Obviously, you will want to avoid situations like the aforementioned example, but they do happen often enough to be discussed. Recharacterizations can be tricky and involve and in-depth understanding of how they work. If you think you may have mistakenly made an IRA contribution, then you will want to speak with your IRA custodian. Be sure to provide them with information regarding the transaction you want to recharacterize (i.e. amount of contribution, when it was conducted, etc.). Once they have that information they can find the amount and properly process it as a recharacterization. If you are considering a recharacterization or are unsure of whether a contribution you made should be recharacterized, you will first want to speak with a certified financial planner or wealth manager to make sure you actually can do a recharacterization. From there you can then move forward with the transaction.
Retirement can be a long way off for teenagers, but given how much retirement can cost–and the costs will probably continue to rise throughout future generations–there’s no such thing as getting too early of a head start. No, you teenager might not fully appreciate how much such steps may help in the future, but that shouldn’t be a good enough reason not to at least talk to your teenager about starting to save for retirement as soon as they are able. Of course, you can start off through conversation. However, if you really want to make an impression, you may want to consider setting up a Roth IRA for your teenager once they have a job and earn income. You can teach them the importance of saving for the future by having them make contributions from their income. Now, obviously, it might be hard to get a teenager to part with their money, but you may be able incentivize them by offering something like a matching contribution or a reward for contributions they make. There is a number of things they can do with that money once it’s in a Roth IRA, particularly relating to education expenses or buying a first home. Before you jump right into opening a Roth IRA for your children, you will probably want to speak with a certified financial analyst or wealth manager and possibly even bring your teenager along so that you can hash out a plan for contributions and what the money will be used for. A retirement professional may also be able to better explain what the purpose of a Roth IRA is and be better informed when it comes to helping with such an account–that is if you choose to have a professional oversee it.
If you’ve been staying on top of retirement news over the past 12 months, then you’ve probably read about the passage of the SECURE Act and it’s termination of the stretch IRA as an estate planning tool. Just a quick refresher, but a stretch IRA was an IRA inherited by a beneficiary in which the beneficiary then took required minimum distributions (RMDs) according to his/her life expectancy and not that of the original IRA owner. If the IRA was inherited by a young beneficiary, that meant the funds could grow, possibly over decades, before the inheriting beneficiary reaches 72 and has to start taking RMDs. The SECURE Act got rid of that and replaced the Stretch IRA with a 10 year rule, which means that the money in the inherited IRA must be emptied by the 10th year after inheriting. Of course, if there is money left over, it will be penalized by the IRS (what else is new, right?). This might seem like a hassle, but it can actually allow a lot of freedom, particularly in regards to when you take the money. Over that 10 year period, you are not required to take money every year. Now, you could do that if you wanted, but you could also take distributions 8 out of the 10 years or 5 out of 10 years. This can open up a lot of opportunities to adjust your financial and retirement plans and use the money at your discretion. All that matters is the account is empty by year 10. Of course, if it’s a Roth IRA, the money is already taxed, which is an added bonus. If you have questions about the 10 year rule or it appears that you may inherit one on the future and want to start planning what to do with the money, you should speak with a certified financial planner or wealth manager.
Have you made an IRA contribution for 2019 yet? Are you worried that you might not get the chance to? Well, there is good news. While you probably heard that the IRS extended the deadline for filing taxes to July 31, you probably did not know that the deadline for making a prior year contribution was pushed back to July 15. That’s three extra months! That might not seem like a big deal, but it could be for many Americans who didn’t get to make a contribution for 2019. If you didn’t get to make a contribution–and of course have the money to do so–you should strongly consider taking advantage of the extended deadline. If you already made your 2019 contribution, then no worries, just focus on your 2020 contribution. Of course, if you do take advantage of the extended contribution deadline, be sure to notify your IRA custodian of the year the contribution is for and to ensure that it is properly designated so that there are no issues with taxes or anything else that could open you to penalties. If you have questions about Roth or traditional IRA contributions, you should talk with a certified financial planner or wealth manager.
With the stock market appearing to head towards a–dare I say it–recession, now might seem like an odd time to talk about converting your traditional IRA to a Roth IRA. However, converting when the markets are low actually might be the best time to do so. When it comes to Roth IRA conversions, the tax bill for doing so is based on the value of your traditional IRA assets. Thus, when the markets are down, there’s a really good chance your IRA assets are down too, which means a lower tax number. As for the actual tax hit, as you may well know, when you convert a traditional IRA to a Roth IRA, the pre-tax funds you convert–your traditional IRA monies–will be included as part of your income for the year. That can be a hefty tax increase depending on how much you are converting and it’s important to keep in mind that that tax hit will only be for the year in which the conversion occurs. It will hurt short term, but long term, you may just avoid a bigger tax hit further down the road if you follow the Roth IRA rules. In other words, you won’t feel great about it now, but when you take your future Roth IRA distributions tax-free you’ll probably feel pretty good about the decision. Keep in mind that a Roth IRA conversion isn’t the easiest thing to do and not doing it right can open you up to some serious issues and penalties. Therefore, I encourage you to reach out to a certified financial planner or wealth manager or your plan custodian. Even if you don’t actually go through with a conversion, you can at least talk to them about the process and when it might make sense for you.
If you have more than one IRA, you can aggregate the required minimum distributions (RMDs) and take them from one IRA. Most IRA owners are familiar with this allowance. However, not everyone is aware of that fact that you cannot include inherited IRAs as part of that aggregation. It can be easy to overlook. It should be noted though, that if you inherited multiple IRAs of the same type (Roth vs. traditional) from the same person, you can aggregate the RMDs from those. In short, if you have multiple IRAs, one of which is an inherited IRA, you will need to take at least two RMDs. One for the inherited IRA and an aggregation of the others–should you choose to aggregate. As with everything else regarding RMDs, you want to make sure that you are following this rule as failure to properly take an RMD could open you up to IRS penalties and could be costly. If you have questions about whether you can aggregate your RMDs or need help with doing so, you should speak with a certified financial planner or wealth manager.
If you are a freelancer or small business owner, you probably have a lot to worry about when it comes to your work or business. You have expenses to track, work to do, clients to satisfy, and maybe an employee or two to oversee. With all that, it can be easy to forget about saving for retirement. Not only that, but you don’t have the reminders regarding opening a retirement account or automatic retirement account enrollment that are standards in larger business and corporations. Thus, it’s imperative that you take it upon yourself to think about and take the required steps to start saving for retirement. If you are freelancing as a semi-retirement gig or started your own business after putting in time in the corporate world, then you may already have an IRA or 401(k) where you have built up a nice nest egg. If you don’t, then go and open a traditional or Roth IRA (401(k)s are employer sponsored). There are other options too that are geared towards those that own their own small business. A SEP IRA is another great option for freelancers and the self-employed as eligibility is fairly wide-ranging and it offers a lot of flexibility regarding contributions. However, it should be noted that it has required minimum distributions (RMDs) just like that of a traditional IRA. Another option that can be enticing if you own a business with a few employees–or work for a small business–is a SIMPLE IRA. A SIMPLE IRA offers options for both employees and employers and requires employer matching, which is a win for employees. You could also consider just doing a traditional IRA or a Roth IRA, which are fairly common retirement saving options for many Americans. Regardless of what you decide to do, all that matters is that you are saving for retirement and are preparing for your future. If you need help deciding, you should talk with a financial advisor, particularly one who works with a lot of small business owners.
Did you make an IRA contribution only to later find out that your were not eligible to make that contribution? Or maybe you made a contribution and later decided that you wanted to use that money elsewhere? Whatever the reason, just know that you can essentially take back a Roth IRA or Traditional IRA contribution, provided you file the paperwork for doing so on time. The deadline for correcting an IRA contribution is October 15 of the year after you made the contribution. That might seem like a random deadline, but I can assure you it is not. It’s exactly six months after the deadline for filing your taxes, which is the amount of time you’d get after filing applicable extensions anyways. Thus, the deadline for correcting 2018 IRA contributions is October 15, 2019. Now, if you want to make a correction, you will have two options: withdraw the contribution or recharacterize it. If you are considering correcting an IRA contribution, you should speak with a certified financial planner or wealth manager to make sure you do so properly and on time. Remember, if you don’t make the correction on time, you could face a 6% penalty for an excessive contribution.
A backdoor Roth IRA conversion can be tempting if you are considering retiring early and are currently over the income limits for a Roth IRA contribution. In case you are unfamiliar, a backdoor Roth IRA conversion is where you contribute money to a traditional IRA and then convert that money into a Roth IRA. This is a useful transaction for those who earn too much income to contribute to a Roth IRA as Traditional IRAs have no income limits. It’s also a perfectly legal transaction. However, when doing a backdoor conversion, keep in mind that the taxman will get his due and that this is not a way to avoid paying taxes on IRA contributions. The money you convert will most likely count as income and you will have to pay taxes on the money in your Traditional IRA that hasn’t already been taxed. It’s also important to understand how the IRS looks at your retirement funds. If you have more than one IRA, the IRS looks at the total of your IRAs and not just the IRA you make the conversion from. This can really pose a problem if you have more than one IRA with a large balance and may make you walk away from doing a backdoor Roth IRA conversion if the taxes are too high. Income limits are another important thing to understand when doing a backdoor Roth IRA conversion. Doing one backdoor conversion doesn’t mean you can start making regular contributions to the newly created Roth IRA. Rather, you will need to do a backdoor conversion every year that you are over Roth IRA income limits, which can potentially be for many years, especially if you are a high-income earner early in your career. That’s a lot of backdoor conversions and that can leave you open to the possibility of making more mistakes. A mistake on a backdoor Roth IRA conversion can be costly depending on the amount you convert and it can be as much as 6% of the conversion if you do so over the income limits. Since backdoor Roth IRA conversions are not particularly common and require a lot of thought, you should seek out the advice of a certified financial planner before doing one.
As you move through your career towards retirement, you will inevitably spend time planning for the future. As part of that planning, you should make sure to take advantage of the IRA “sweet spot” that exists between ages 59 1/2 and 70 1/2. What makes that time period so sweet? Well, for starters, you can start taking distributions from your IRA and not get hit with a early distribution penalty. Now, you will have to pay taxes on that money, but nothing more. You are not required to take money out during that period, but it’s an option. It’s also a great time to consider converting a traditional IRA–if you have one–into a Roth IRA, which can give you even more control over your retirement funds. Remember, a Roth IRA does not come with required minimum distributions (RMDs), which means you don’t have to start taking money out when you reach age 70 1/2. Your time in the sweet spot can be a great time to put your retirement plans into action or form more detailed versions of your plans. You can start setting yourself up to be a part of a lower tax bracket in retirement by lessening your nest egg by taking money out during the sweet spot period. It’s also a good time to take care of any preliminary costs that you may have in retirement. For example, if you plan on moving for retirement or buying a summer home, that sweet spot time can be a great chance to make that new purchase or prepare your finances to do so once you reach retirement. You can also use that time to pay down debts so that you don’t have to worry about them once you do retire. Regardless of what you decide to do, you should speak with a certified financial planner before you make any decisions during this period as they can help you make the most of it. Are you planning to take advantage of your pre-retirement “sweet spot”?